NO ONE likes handing over their hard-earned money to the taxman – but could you be giving away too much?
You don’t need to be rich to cut your tax bill as there are plenty of tricks to reduce how much you pay now, regardless of your income. Top money journalist Holly Mead explains how.
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We all know tax evasion is a crime, but there are many legal ways to keep more of your well-earned money.
If you are an average earner with an income of less than £50,270 then you could save £2,700 a year with our tips.
Or if you’re lucky enough to earn more than this, then our tricks can save you £2,912 annually on cars and childcare.
Plus, if you’ve been lucky in love, then you could make use of a little-known loophole to save £252.
Read on to find out ten ways you can cut your tax bill NOW as we share our top tips to get started.
Average earners
Become a savvy saver
Many people don’t realise they may need to pay tax on the interest they earn from their savings.
Basic rate taxpayers get an annual savings allowance of £1,000, but if you earn more interest than that, you’ll pay your usual rate of income tax on it.
That means someone with £20,000 in savings earning 5% interest would reach the limit.
Meanwhile, for higher-rate taxpayers, the allowance drops to £500.
But lower earners get a £5,000 allowance, called the starting rate for savings, so if one person in your household earns below £12,570, then you should take advantage of this.
At that rate, you could have a massive £100,000 in savings before you’d bust the limit.
Avoiding paying 20% tax on that extra £4,000 of savings could save you £800.
For every £1 you earn above £12,570, you lose £1 of this extra savings allowance.
Meanwhile, the allowance disappears completely once you earn £17,570.
How much do I have to give the taxman?
EVERYONE in the UK has a personal allowance, which means they can earn £12,570 each tax year before paying any income tax.
The tax year runs from April 6 to April 5.
You pay income tax at 20% on any money that you earn between £12,571 and £50,270.
This is known as the basic rate.
On earnings between £50,271 and £125,140 you pay 40%, which is called the higher rate.
Meanwhile, the additional tax band is currently fixed at £125,140, beyond which any earnings are taxed at 45%.
The tax applies to your salary and any income you earn on savings and investments (unless they are in an Isa) or from a buy-to-let property.
Income tax bands are frozen until April 2028 but wages have continued to rise, which means you are probably paying more tax than you used to.
This could get even worse, with tax rises expected to come in the Autumn Budget.
A higher tax bill coupled with a rising cost of living means even less money in your pocket.
That’s why it is important to make sure you are using all of the legitimate loopholes that can help you pay less tax.
Sarah Pennells, head of financial capability at Royal London, said: “Ultimately, tax can be confusing. Our research found that 37% of people had received higher tax bills than they had expected in the past.”
“Being aware of the different cliff edges, tax charges and allowances is important. Small changes could make a big difference.”
Laura Suter, director of personal finance at AJ Bell, said: “This trick is particularly handy for couples where one has a low income, but as a household they have a decent amount in savings.”
Potential saving: £800
Get a flatmate
If you have a spare room at home, you can earn up to £7,500 a year by renting it out without paying any tax.
For a basic rate taxpayer, that would mean a saving of £1,500 on that income.
Meanwhile, a higher-rate taxpayer would save a whopping £3,000.
The government’s rent-a-room scheme is designed to encourage people to rent out spare space, increasing the number of rooms available for those who need them.
The room needs to be fully furnished to qualify, and you don’t need to own your home to use this tax break.
If you are renting, then check your rental agreement before you look for a tenant.
If you earn more than £7,500 from renting in a year, you need to declare it on a self-assessment tax return.
Bear in mind that this allowance is per household, not per individual, so if you’re in a couple, you effectively get £3,750 each.
Potential saving: £1,500
I’ve saved thousands with a five minute trick
MUM-OF-TWO Karen Simpson has saved thousands of pounds by boosting her pension contributions to reduce her tax bill.
The 43-year-old, from Inverness, said paying more into her pension has helped her to avoid tipping into the 40% higher-rate income tax bracket.
The busy mum said that doing this has saved her thousands of pounds in tax.
Karen, who runs tutoring company My Primary and Secondary Tutor, said: “A few years ago, I didn’t even have a pension and now I’m paying between £18,000 and £25,000 into it each year.”
Although increasing her pension contributions means Karen has less money now, she said she doesn’t need the extra income right away.
As a result, she’s happy to lock the cash away in her self-invested personal pension until she can access it when she is 55.
Karen said: “When you’re self-employed, you need to save as much of your money as you can and look for the loopholes.
“Otherwise, it feels like they want more from you at every turn.”
Karen has maxed out her £20,000 Isa allowance this year after hearing rumours that it could be cut in the Autumn Budget.
She has also cut her tax bill by donating to charity, selling items on eBay and Facebook Marketplace.
Meanwhile, when she was on maternity leave, she made use of the marriage allowance.
Karen said: “As soon as you hit the 40% income tax bracket, it feels as though you’re giving your money away.
“Taking these steps makes a significant difference.”
Start a side hustle
If you have a hobby or side business, you can make extra income tax-free.
Everyone gets a trading allowance, which lets them earn up to £1,000 from a side hustle without paying any tax.
This could be from tutoring, selling arts and crafts or dog-sitting.
On top of this, you also get a property allowance of £1,000 for income earned from your home, including renting out your driveway or garage.
Maxing out both allowances would save you £400 in tax on the extra income.
Potential saving: £400
Higher earners
Give yourself a pay cut
Just got a pay rise? Congratulations!
But if your new salary means you are now a higher-rate taxpayer, you might want to reduce your pay.
This is because you’ll pay 40% tax on every £1 earned above £50,270.
Meanwhile, parents earning above £60,000 face an added blow because they start to lose their child benefit.
If you can afford to, putting more money into your pension can help in both of these cases.
For example, if you earned £55,000, you would pay 40% tax on £4,730 of that, giving you a take-home pay of £42,457 a year (assuming no deductions), and a total income tax bill of £9,432.
Instead, if you put that £4,730 into a pension, you would have take-home pay of £39,619 and pay £7,540 income tax.
Although your take-home pay is £2,838 lower, you’ll have saved £1,892 in tax.
Plus, by doing this, you’ve put thousands of pounds into a pension which can grow over time and help give you a comfortable retirement.
If that £4,730 grew at 6% a year, after ten years it could be worth £8,606.
Robert Salter, director at the accountancy Blick Rothenberg, says: “Topping up your pension is a prime way to potentially reduce your tax bill and, equally importantly, save for retirement.”
Potential saving: £1,892
Make work pay
Salary sacrifice is where you agree to a lower salary in exchange for certain workplace benefits.
This can help workers on the cusp of the 40% income tax band bring their salary back into the lower tax band.
Cycle-to-work schemes are one option, says Chris Etherington, a private client partner at accountancy RSM UK.
This is where you purchase a bike through your employer.
The purchase is considered “gross”, meaning before tax, so you effectively save the tax on the cost of the bike.
How do I check my tax code?
YOU can check your tax code on your personal tax account online, on any payslips or on the HMRC app.
To log in, visit www.gov.uk/personal-tax-account.
If you have one, you can also check it on a “Tax Code Notice” letter from HMRC.
Bear in mind that you might need your Government Gateway ID and password to hand to log in.
But if you don’t have this you can use your National Insurance number or postcode and two of the following:
- A valid UK passport
- A UK photocard driving licence issued by the DVLA (or DVA in Northern Ireland)
- A payslip from the last three months or a P60 from your employer for the last tax year
- Details of a tax credit claim if you have made one
- Details from a self assessment tax return (in the last two years) if you made one
- Information held on your credit record if you have one (such as loans, credit cards or mortgages)
With the electric car scheme, some employers let you lease an electric vehicle (EV) through the company, so you don’t pay tax on the monthly payment.
For example, if the lease was £300 a month, a basic rate taxpayer would save £60 in tax on it.
“Cycle to work schemes can be an effective, albeit modest, way to reduce commuting costs and your taxable income,” says Etherington.
“Electric car schemes offer significant savings on income tax and make EVs more accessible to middle earners.”
Potential saving: £720 (on a £300 monthly lease)
Make your money work for you
Around 822,000 savings accounts are set to earn more than £1,000 in interest this year, according to Paragon Bank.
This means a surprise tax bill could be on the way for these savers.
The easiest way to avoid paying tax on your savings is with an Isa.
You can put up to £20,000 a year into these accounts and any gains you make are tax-free.
A basic rate taxpayer with savings of £25,000 earning 5%, would make £1,250 in interest and pay tax on £250 of this – £50.
A higher rate payer would pay 40% tax on £750 of this interest – a tax bill of £300.
But if you put the money into an Isa there would be no tax bill.
Andrew Wright, head of savings at Paragon Bank, said: “Many savers have had a great return on their savings but could ultimately breach their personal savings allowance as a result.
“Review your accounts and make the most of other products such as cash Isas.”
Potential saving: £300
Married couples
Team up with your spouse
If one of you earns less than £12,570 a year and the other earns less than £50,270, you can take advantage of the marriage allowance.
This lets the lower earner transfer 10% of their £12,570 personal allowance to their spouse – which works out at £1,260.
Do I need to pay tax on my side hustle income?
MANY people feeling strapped for cash are boosting their bank balance with a side hustle.
The good news is, there are plenty of simple ways to earn some additional income – but you need to know the rules.
When you’re employed the company you work for takes the tax from your earnings and pays HMRC so you don’t have to.
But anyone earning extra cash, for example from selling things online or dog walking, may have to do it themselves.
Stephen Moor, head of employment at law firm Ashfords, said: “Caution should be taken if you’re earning an additional income, as this is likely to be taxable.
“The side hustle could be treated as taxable trading income, which can include providing services or selling products.”
You can make a gross income of up to £1,000 a year tax-free via the trading allowance, but over this and you’ll usually need to pay tax.
Stephen added: “You need to register for a self-assessment at HMRC to ensure you are paying the correct amount of tax.
“The applicable tax bands and the amount of tax you need to pay will depend on your income.”
If you fail to file a tax return you could end up with a surprise bill from HMRC later on asking you to pay the tax you owe – plus extra fees on top.
This effectively boosts your spouse’s personal allowance to £13,830, and so saves them £252 in tax a year.
Good news if you’ve not heard this tip before: you can backdate it by four years and potentially save £1,008.
An estimated 2million people who are eligible for this tax break are not claiming it – check if you qualify using the government’s calculator: tax.service.gov.uk/marriage-allowance-application/benefit-calculator
Potential saving: £252
Save money on childcare
Families can claim up to £2,000 from the government to help with childcare costs through a lesser-known savings scheme.
You can put up to £500 into a tax-free childcare account every three months, and for every £8 you pay in, the government will add £2.
The cash can be used to pay your nursery or childminder.
To claim, both parents must be working and earn at least the minimum wage for a minimum of 16 hours a week.
You have until the September after your child turns 11 to claim and spend the money.
Those with a disabled child can claim up to £4,000 a year, and have until they are 16 to claim it.
Potential saving: £2,000 (or £4,000 for parents of disabled children)
Split the bill
Sharing your savings and other assets could half your tax bill.
For example, if you have savings in a joint account then each person’s savings allowance is applied before tax is paid – even if one person didn’t contribute any of the savings.
That means you can earn £2,000 in interest tax-free, rather than the usual £1,000, as long as you are both basic rate taxpayers.
Robert Salter says: “If a bank savings account is in both partners’ names, the interest is taxable on a 50/50 basis.
If one person pays tax or a higher rate of tax, and the other doesn’t, it may be better to have the savings in the name of the lower-earning spouse.”
This also works if you own a buy-to-let property.
If the property is in both partner’s names then you share the tax you owe on the rental income, and could reduce your bill by having it in the lower earning spouse’s name.
This is also useful when you sell the property as you can use each person’s annual capital gains tax (CGT) allowance on any profits before paying tax.
Currently, individuals get a CGT allowance of £3,000 a year, and after that you pay 18% tax (or 24% for higher rate payers).
For example, if you bought a property for £150,000 and sold it for £200,000, you would need to pay tax on the £50,000 profit.
After deducting the £3,000 CGT allowance, that would mean paying 18% tax on £47,000, which is £8,460.
But if the property were held in two people’s names, you would subtract each person’s CGT allowance.
You would pay 18% on £44,000, which would mean your tax bill is £7,920.
Potential saving: £540 on the property sale
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